Bond Bank

Bond Bank
See also

Bond banks are "agencies created by a few states to buy entire issues of bonds of municipalities. The purchase is financed by the issuance of bonds, by the bond bank. The purpose is to provide better market access for small, lesser-known issuers" [1].

History of the Bond Banks in the United States

First state bond bank was created in 1970. several state governments in the United States of America arranged bond banks[2]. Band banks were usually established with a specific condition in a particular region[3]:

  • population with a low amount of people;
  • countryside states.

Nowadays only a few of those banks exist. However, in the United States of America, most states have found ways to give their smallest municipalities the means to borrow money at tax-exempt rates, even if the institution proposing that offer isn't called bond bank [4].

How bonds bank verify municipalities

In the United States, to be eligible for bond bank municipalities must first fulfil their required jurisdictional obligations for issuing debt. When deciding as to whether to include a certain municipality's debt, bond banks examine the same pieces of information as the credit rating agencies. Banks are checking[5]:

  • amount of bonds;
  • if the issue was publicly voted on;
  • what asset or taxes are being pledged;
  • the project feasibility study;
  • the intended sources and uses for the bank's funds;
  • the municipality's current outstanding debt;
  • any previous defaults;
  • the local economy;
  • the population figures;
  • property tax statistics;
  • the current year's budget;

After checking that, bond bank can finally decide whether or not accept municipalities into the debt pool[6].

Operations of the Bond Banks

Bond banks buy bonds and loans from various units "of from 20,000$ right on up to several millions of dollars"[7]. Then banks pack them into a single issue for in the municipal market. It gives some economies of scale and access to tax-exempt interest rates even for the smallest localities. For example, Vermont offered to give the mandate to provide municipalities with access to capital markets at the lowest possible cost[8].

Example of the Bond Bank's operation

Unlike most organisations arranged by governmental organisations, municipal bond banks help municipalities without huge financial burden upon the taxpayer. The bonds bank of Alaska has produced excess returns to the state ever since the year 1977 for a cumulative 23.2 million dollars. This sum is more than the state of Alaska's original investment 18,6 million dollars), and even though this may seem like a relatively poor rate of return on capital, it must be kept in mind that those banks are not run as for-profit operations, because the bond bank's primary objective is to offer lower-cost loans for the state's municipalities[9].

Footnotes

  1. Security Industry and Financial Market Association, 2011
  2. Paulais T. 2012
  3. Paulais T. 2012
  4. Mysak A. J. 2012
  5. Ito T. Park Y. C. (2014)
  6. Ito T. Park Y. C. (2014)
  7. Mysak A. J. 2012
  8. Mysak A. J. 2012
  9. Ito T. Park Y. C. (2014)

References

Author: Michał Dembowski